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For many business owners and executives, filing Chapter 11 bankruptcy seems like admitting defeat. But it shouldn't be that way.
The bankruptcy code exists to provide second chances. Chapter 11, which covers
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Bankruptcy Law Passed A wide-ranging law that brought major changes to the country's bankruptcy laws was signed by President Bush on April 20, 2005 and went into effect on October 17, 2005. Under the Bankruptcy Abuse Prevention and Consumer Protection Act, it is now more difficult for individuals to file for Chapter 7 bankruptcy, which wipes out most unsecured debts -- including credit card debt.
In addition to the major alterations in consumer bankruptcy, the law brought numerous changes for business bankruptcy cases, including different rules for reorganizing under Chapter 11. And it created a new chapter of the Code, Chapter 15, which addresses cross-border insolvency. |
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Chapter 11 immediately freezes all financial claims against the company and stops lawsuits and collection activities. | business reorganizations, allows struggling companies to right themselves so that they may once again be profitable engines of the nation's economy.
No provision in the bankruptcy code is more important to achieving this goal than the automatic stay provision of Section 362.
The automatic stay provides a time-out - a window of opportunity to fix problems. In some cases, time is all that's needed.
Whenever a company -- or an individual -- files for bankruptcy, the automatic stay kicks in. All debt collection actions against the company must temporarily cease. Like a temporary injunction, the automatic stay prohibits any action by a creditor against the debtor or its property.
Some actions are prohibited by creditors under an automatic stay. The automatic stay affects even the IRS. While the stay is in place, the IRS is generally prohibited from issuing tax liens or seizing property.
There is one major difference between the automatic stay in bankruptcy and a normal temporary injunction: No hearing is needed for the automatic stay to take effect. It occurs as soon as a petition to file for bankruptcy is stamped at the court.
A company can then move forward without fear. The bankruptcy court has the power to punish creditors that knowingly violate a stay by filing a contempt charge against them. Harassing letters and phone calls should stop. If they don't, notifying the court of a creditor's transgression generally ends the problem.
While the automatic stay is in place, the debtor company is prohibited from paying most of its pre-petition debts. This provides a chance for the company to rebuild itself as a going concern.
You might think that filing for bankruptcy to get an automatic stay sounds all-well-and-good, but filing will surely dry up the pool of available credit for things such as operating expenses. Won't bankruptcy tie the company's hands and kill any hope of future success? This is rarely the case. Generally, a struggling company has an easier time obtaining credit once bankruptcy has been filed and the automatic stay is in place.
Credit availability tends to increase because of the prohibition against paying pre-existing debts. All debts incurred after bankruptcy has been filed (post-petition debts) must be paid first, before any pre-petition debts. As long as the company shows that it can operate profitably if it doesn't have to immediately pay its pre-petition debts, credit is likely to be available.
Consult with a professional about the best way to proceed. And keep in mind that corporations that successfully come out of bankruptcy almost always do so because of fruitful negotiations with creditors. The automatic stay is not a cure all. For some businesses, no amount of time can fix things. But for a company that is fundamentally strong, with credit in hand, the automatic stay provides an important opportunity to talk to creditors and get back on track.
(For more information, click here to read our article "Chapter 11 Gives Corporations Breathing Room")
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Our firm provides the information in this e-newsletter for general guidance only, and does not constitute the provision of legal advice, tax advice, accounting services, investment advice, or professional consulting of any kind. The information provided herein should not be used as a substitute for consultation with professional tax, accounting, legal, or other competent advisers. Before making any decision or taking any action, you should consult a professional adviser who has been provided with all pertinent facts relevant to your particular situation. Tax articles in this e-newsletter are not intended to be used, and cannot be used by any taxpayer, for the purpose of avoiding accuracy-related penalties that may be imposed on the taxpayer. The information is provided "as is," with no assurance or guarantee of completeness, accuracy, or timeliness of the information, and without warranty of any kind, express or implied, including but not limited to warranties of performance, merchantability, and fitness for a particular purpose.
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